Protecting Against Portfolio Disaster

Protecting Against Portfolio Disaster

Whilst many investors have concluded spending cash on hedging is a waste of money, Jerry Haworth, co-founder of 36 South Capital Advisors, argues that the time is ripe for tail hedges. Jerry explains what a tail event is and what it’s not, and examines various hedging strategies. He also outlines the characteristics of the current environment that makes this type of hedging so compelling at the moment. Filmed January 8th, 2018 in London.

Comments

Would be interesting if the realvisiontv people gave there comments when they see many of the same questions. I liked the interview but timing is everything and even with low vol these strategies can get expensive which the speaker did not talk about bit is exemplified In the fund spoor returns. Sometimes a systematic trading fund is a cheaper route and effective but. It guaranteed to payout like pure protection.

The managers at 36 South talk a good game. However, they're in the business of 1) maximising their winnings when they're right, 2) minimising their losses when they're wrong. Unfortunately they're down ~15% *per year* since 2011 in their Kohinoor fund. An investor in their fund needs to make 200% when the PMs are right just to get back to their entry point. The protection they're buying is too expensive or they're getting their sizing totally off fleek.
That said, it was a good interview. Thanks RV.

100% correct last 3 years losses in Core Fund would take a 90.83% return to just get back to breakeven after last 3 years. Now it is well possible that in a crisis they could produce such a return but another down year and they may be facing business risk.

I've just listened to this having watched it once also. Really keen for any input on where / how to get 5 year options (puts specifically). I'm guessing this may not be available for retail customers? Any guidance appreciated.

Agreed - it looks unavailable in both Interactive Brokers (IB) and Bloomberg. The longest dated option on the S&P in both IB and Bloomberg is 12/28/2020 and the longest dated option I see on the VIX in both IB and Bloomberg is 7/18/2018. Anyone know where to gain access to five year options on the VIX or S&P?

I have basically the same question as Sean and Eric: how and where to buy an S&P500 option (or any other underlying) with 5 years till expiration? @Realvision team, your guidance is highly appreciated. Thanks.

I contacted them and got the following answer, which makes sense, it's OTC options:
"Dear Ralph,
Apologies for the delay in getting back to you and I'm happy to hear you enjoyed Jerry's Realvision interview.
Unfortunately we can't give you advice on buying options. It may be useful for you to know that few of the options our funds invest in are on exchanges like CBOE would provide; most are over the counter and require ISDAs. I don't think these would be available to private investors.
Kind Regards,
James
James McAdam Stacey
Investor Relations Assistant
36 South Capital Advisors LLP"

Great presentation of a complex subject. The first time I think that I know enough to ask the right questions. Since 2008, the money printing, low interest rates, stock buybacks, and pension fund volatility strategies did not result in higher consumer prices, but in higher P/Es and lower interest rates. Long-dated tail hedges maybe good insurance, and maybe an even better way to just make some money. DLS

I think that’s a little harsh, I found this an incredibly educational talk, and having watched it once will listen again via audio. That said, I’d love to firm this up into actionable trade ideas and think RV has a lot of qualified subscribers who could add discussion, value, insight, direction and guidance on possible trades. Would be great to get some sort of forum going to facilitate this.

I had to print out the transcript to be clear on his suggestions since he had such a heavy accent and no video "closed caption". He does give examples of how/what to buy the hedges. However, it might be best to talk to a broker who would know YOUR personal risk tolerance and their suggestions for tail hedge. This was one of the best interviews I've seen in terms of how do you take advantage of the low volatility. RealVision isn't always forthcoming with trade suggestions as I think they assume many of their subscribers are already familiar with trading and derivatives, which is not always the case. I would have preferred his opinion on a leveraged short ETF on oil, gold, or S&P. Easier accessibility to the retail investor if they don't understand options. Trade safe.

Very good program and especially nice to hear another person on RV say they don't know what is going to happen in....unlike CNBC or Bloomberg where nearly every guest is 200% certain stocks go to the moon for the next...

Outstanding. As a relatively new investor, the conversation helped deepen my understanding beyond buying things that are inversely correlated. I have been thinking when my hedges come to fruition how do I exit and his approach to regret backstopping at 8 hoping for 10 or beyond made a lot of sense. More top quality RealVision content. Thanks RV

Jerry is not only a very experienced volatility trader and a very smart man, but he's very modest. He didn't mention that 36 South had amazing success in 2008, They launched that Black Swan fund in Jan 2008 and it made 236% that year. Another of their funds made 73%. Jerry knows what he's talking about and is someone who deserves the greatest respect.

@Jerry: Fantastic video, thanks.
A question- "99% of people don't expect oil to go anywhere or to go lower".
Erik Townsend (Macrovoices podcast, 12th Jan) just said "the long/short ratio is 10-to-1, so everyone is expecting oil to rise".
Can you advise where you got your info?
Which is true?

I read the comments re: questions being added. I have listened to this and watched this and I don't think it helps. It's pretty obvious. But, I must say I can only watch during cocktail hour so I can't be objective. I think this was top notch.

I love this man: "the good portafoglio manager is responsible for the structure of the portfolio not for the happiness of his clients". This is going to be my answer when my clients ask me why we are not short the VIX

Last couple weeks I've been progressing through this book called Tail Risk Hedging by Vineer Bhansali so I was very excited to see what's this video is about. I have to admit that after watching this, I am a little bit disappointed.
First of all, I was missing some sort of tangible aspects on how tail risk hedging is done in practice and why. For example, why on earth do you want to buy long expiry options (LEAPS) vs. you buy shorter expiry, but more frequently? I don't think this thing can be addressed just so that "you want to have more time for things to happen", because clearly you can just buy cheaper puts more frequently.
For example in Bhansali's book there is discussed in the chapter "Basics: Tail Risk Hedging for Defense" that rolling tail hedges is more efficient strategy than buying long maturity tail hedges. He gives couple good reasons why you should favor more frequent rebalancing of hedges:
1. Having more frequent hedges "averages" out the premium spend and the attachment point.
2. It avoids "cliff" effect on hedge becoming more distant as we near expiration
3, More frequent rebalancing of tail hedges might go better with the overall recalibration of the portfolio exposures within the one year period.
Of course the efficacy of rolling tail hedging vs. leaps depends also on what kind of volatility environment we have: Is the volatility curve flat, steep or inverted? Because now we have steep vol curve (short term vol lower than longer term vol) as Jerry explains and rolling tail hedging does even better in steep vol environment than in other environments. So now should be the best environment to use rolling tail hedging strategy?
So basically there are all the arguments standing behind the fact that we should use more frequent tail hedging now. There is also calculations done in the book to demonstrate that more frequent tail risk hedging might be better. I think there should have been more work put on to explain why Jerry favors long maturity tail hedges.
My second point: Jerry says you should buy OTM index equity options if you want equity tail hedge. What index should we choose? Because I heard Nassim Taleb saying some time ago that the s&p vol is now the most expensive vol out there (when we compare it to other indexes). So I was missing more clarification on this, what is the best place to buy tail risk hedges? In my personal opinion it's actually high yield ETF options (HYG,JNK) where you should find cheap tail hedge, because there you have the liquidity migration away from the cash market to the CDS/CDX market which causes a huge liquidity mismatch between the ETF and the underlying bonds. Now because high yield bonds have a lot of beta risk and the common liquidity factor with equities, the "tail event correlation" between high yield and equities should be approximately the same or the tail event can be even bigger in HY vs. equities. Just an opinion though.
Finally, I don't know if this is the content you cannot get from EVERYWHERE right now. Everybody's talking about rising equity-bond-correlations and how this can lead to disaster, everybody is talking about low vol (VIX and S&P vol especially) and everybody says that deep out-of-the money puts are cheap. So even though these are important things to discuss, I have to say that almost everyone is aware of these.
I don't know what other real vision viewers expect, but I wish there was more profound discussion on the subject and maybe a bit more practical information.
Thanks

I think Jerry gave the answer to your basic question: his hedging strategy provides the most "worry-lite" insurance against a 3+ standard deviation "gap event," and performs even more spectacularly in a catastrophic event. To me, the "reading between the lines" interpretation I discern in the strategy he has articulated, is that he is clearly anticipating an even greater tail risk event than has occurred since 1987 -- a "mother of all gaps" event, if you will.
I am inclined to believe he is correct in this assessment, although I have long since given up attempting to predict the imminence of the event in question. I only believe that it is nearer now than ever before.

I agree re: rolling shorter dated 'cheaper' puts from my experience (I spend about 4% per annum on such) - 2017 was simply awful! Not one negative month!
Often that one or two bad months a year will make up 50% plus of performance.

I'd also add to the responses here that once the broad market sentiment shifts from bearish on fear to bullish, the longer dated your puts, the longer time allotment there is for the linear thinking herd to project declines into massive declines. This sentiment will likely occur around the peak of the VIX spike. The longer dated options will be more valuable because of linear thinking, lending towards the idea of convexity.

For the retail investor, the obvious hedge mentioned was to hold a higher allocation to cash. IF one wished to add a bit of tail risk protections, how does one "buy VIX"? The symbol "VIX" does not register on my brokerage account. There is a symbol BSWN (listed as UBS AG VelocityShares VIX Tail Risk ETN linked to the S&P 500 VIX Futures Tail Risk Index Short Term), but I'm having trouble learning about how it is structured and if it would actually provide the protection of being "long the VIX". Any information or direction of where to learn more is appreciated.

OOPS. IF you buy a 3 or 6 month at-the-money put option on SPY or EEM or QQQ, then you will likely see 50-100x gains in a real tail event. To me this is the easiest thing a retail account can do. Stay long, but buy these at 0.5%-2% of portfolio 1-3 times per year. You can capture most of the market upside and not get killed in tail event. Much better than cash. The catch is that this is non-linear so you get little gain from it if prices go down only 5%. It would be a true hedge in a 30-50% plunge. This concept works best when VIX readings are really low.

Interesting Justin but I think you need time for this to play out, although you then have the additional cost too. I would love to get a better idea of pricing here - i.e. strike price (at current level or deep below current price action?), plus timings although I got from this that you really need to play the long game.

Jerry is suggesting indexes but I did look at autos based off previous RV TV big story. That is not currently playing out as prices have rallied but if you believed the thesis and thought this was going to happen in next couple of years you could e.g. buy puts on Ford at $3 or $5 strikes for 2020 for cents. If you saw a similar decline for Ford like the GFC then a drop to around $2 could give you 10x return on your investment. That’s my take although maybe not the best example as Jerry suggests indexes which does make more sense to me - less concentrated risk. Really interested in this at the moment, feel that something has to give soon. But then again a lot of people having been saying that since 2012! Would love to hear input from members with more hedging experience.

I contacted them and got the following answer, which makes sense (OTC options):
"Dear Ralph,
Apologies for the delay in getting back to you and I'm happy to hear you enjoyed Jerry's Realvision interview.
Unfortunately we can't give you advice on buying options. It may be useful for you to know that few of the options our funds invest in are on exchanges like CBOE would provide; most are over the counter and require ISDAs. I don't think these would be available to private investors.
Kind Regards,
James
James McAdam Stacey
Investor Relations Assistant
36 South Capital Advisors LLP"

Made me smile • "the other thing I'm not a big fan of is this dynamic hedging, which my grandmother's knee will start twitching when the black swan event is just about to happen, and I'll put on the position then."

I found the content both interesting and helpful. But as long as others are commenting on the production - here are my two cents. I very much enjoyed the format and style. However, I had the opportunity to watch the video as most of my colleagues are out of the office today and the phones are quiet since its a US Federal holiday. Given the hectic pace of life, or maybe just my inability to schedule it effectively, I often download the MP3 version of the show and listen to it in my car, at the gym, etc. If you are willing to edit the MP3 versions and have a narrator read the screen text I would get almost as much out of the MP3 as I do out of the video. Obviously I would miss the graphics but that's the deal I make with myself when I choose to go audio-only.

Same here John, I listen to pretty much 99% of RV content rather than watch. There’s just not enough time in the day and by listening I can multitask, even if that only means travelling. I generally don’t find video adds much but it would be super useful if audio was not disadvantaged via your suggestions. I bet a lot of people listen to the audio only. The transcripts are useful for catching charts etc. but you really want to know the question being asked when listening to the answer via audio only.

Thanks again. Just so you are aware of the numbers we have to consider; 80% of all views are video, 15% audio and 5% transcript. There is some double counting - video users who listen, transcript readers who watch it.

Useful to know and if I had those figures put in front of me I’d wouldn’t be listening to John or myself. Those figures are pretty much the inverse of podcast media consumption but you could argue that is as audio biased as RV is video biased. Can only go on my own consumption patterns which only makes for a poor proxy on general user experience.

Absolutely superb analysis and discussion that is so pertinent to today's investment climate! I could care less about the sound, music, or color of the presentation.....I find it fascinating that some complain about the production, while not focusing on the meat on the bone. This presentation might just save your portfolio from the long term destruction of the buying power of your assets, which last time I checked is what risk analysis is all about. THANK YOU so much for this, as I now have an exact plan to hedge my long equity for the next five years. This was a fantastic video!

Hello Bruce, I am responding to your comments about my comment on the production. First, I did say how valuable this discussion is to me and I am sure everyone.
Second, this type of production has been used in the past. I hope that providing feedback on production is acceptable to you. If I am the only one who does not prefer this the of production, than RV will ignore it. I put this out on the chance that this was less than positive for others. Thank you for reading my comment. I agree with you the content is always of primary importance. Respectfully.

Thanks all for the discussion on audio titles. We might try it out but its a bit tricky to try to tailor our content for perfectly video/audio/transcripts as usually one is suboptimal. The titles with audio might end up annoying and break the flow. On the video version, our hunch is that the titles only get people to pay attention but it might deter from multi-tasking. We usually get the guests to repeat each question in the first line. We will keep monitoring feedback so thanks v much

I was annoyed when the questions appeared at the same time as the interviewee started replying. But this has gotten better in my opinion.
It might sound obvious, but how about producing the audio version with questions read and the video version without? Win win (with required editing extended by 10 minutes).

MR Haworth's discussion is really important to me. I will listen to it again to get maximum benefit.
I would like to kindly say that producing videos in this manner, mostly black screen with partial face visible and questions posted, I find extremely unpleasant and distracting. I do not know what MR Haworth looks like and wouldn't recognize him if I met him. This type of screen display affects the viewer in an unpleasant way. It is nearly like a podcast except one can't just listen because to know the questions being asked one has to stare at a nearly all black screen. The only reason I can see the producers doing this is to employ cost containment measures. i would respectfully request we return to full visual and full color production and request audible questions as well. Respectfully offered.

Any ideas on how to better share this information. My father recently became fully vested in a pension. I've warned about pension vol selling and equity risk yet because of my market inexperience my thoughts are muted. Not to mention he's part of the herd in CNBC pastures. He has no choice when it comes to the pension but he won't sell stocks because of the dividends. I feel I'm going to watch him get wiped out (along with many Baby Boomers) and there is nothing I can do.

If it is a US pension there is a potential problem. PensionTsunami.com has daily headlines of the coming crisis. Real Vision TV might interview John Bury Actuary and Pension commentator from New Jersey about the coming crisis.
https://burypensions.wordpress.com/
Also: http://stump.marypat.org/ might be interesting to talk to.
Stock dividends see General Electric.

I am very close to having to make this type of decision. Have no intention of taking the USPension but instead taking the lump sum. Problem is the Pension currently returns 5% guaranteed. Lump sums will be restricted if fund value currently at 110% falls below 80%. So now juggling retirement date....... Really need 2 more years!!

If English is not your primary language, Jerry's rather pronounced accent would have challenged your ability to catch all the words. In fact, as an American English speaker, I had to listen very closely to what he was saying in order to catch each word, because his pronunciation is significantly different than what my ears are accustomed to. But I do understand what you mean: I speak very good Italian, and read and write it even better. But I frequently listen to Italian language interviews where the speaker's unique local pronunciation makes it very difficult for me to catch all the words. In such cases, subtitles would be a plus.

Some really good points. Given where the Mr (buble) market is, seems like the tail risks plays make a lot of sense, whether as hedges or pure plays. But as he points out, it should be a longer term play.
The only things I disagree with are:
1. if it is a "hedge" then why looking to make money on it (like 10x etc)? Once you wind down that hedge you're left exposed. If it just a pure bet, then yes.
2. The notion that CBs might decide to increase rates because of the wealth gap effect. That's wrong. It is never a CBs job (nor possibility) to take care of that, it is a job of lawmakers, even though everyone (including lawmakers) seems to think nowadays that CBs indeed can or should take care of that. CBs hope that lowering the rates will stimulate the economy and investment that will later trickle down to all, but whether it does is beyond their control. CBs should be responsible for price "stability" (BTW very low but stable inflation fits into that definition so why pushing it to some arbitrary 2% number is beyond me?), and not for anything else that is really beyond their control like "full employment" mandate or wealth gap/distribution. Therefore in reverse, CBs should not adjust policies because of such problems.
This is not to say that they shouldn't be increasing the rates. Of course they should as the notion of near 0% cost of capital is just flat out stupid and as CBs just figured out it doesn't work for the real economy at all, only creates another bubbles. It's just the fear that doing so will make the markets unravel, besides other issues like currency wars etc. Seems like the current CBs are trying to do all the job of policymakers but without their tools. I'm sure policymakers are happy with that! Someone is trying taking care of the real problems for them and will take ultimate responsibility for that. But nobody considers the fact that they (CBs) don't have the tools for that. So Ms Yellen and the likes, keep staring at your "dashboards"...

For #1, it comes down to position sizing. You'd look to make 10x on a far dated out of the money put option on the SPX as a hedge because the position should be a small portion of your portfolio. Expecting a 10x return on a say 5% position of your entire portfolio would, in theory, give you 50% downside protection. One cannot afford a large position as a hedge or else you would become net short the market. I think you have to assume you're going to lose the entire value of the hedge. So in that case, you core positions would have to yield a greater amount than the cost of the hedge.